Interest Rate Rise Likely in Australia

Reuters

Tuesday, 20 Feb 2007 | 10:40 PM ETReuters

SHARES

Australia's top central banker said on Wednesday that interest rates were more likely to rise than fall in the months ahead, though he was more confident that past rate increases would contain inflation.

In semi-annual testimony before lawmakers, Reserve Bank of Australia (RBA) Governor Glenn Stevens said there was a risk inflation could remain uncomfortably high if demand picked up unexpectedly.

While the central bank had forecast a slowdown in underlying inflation, it was still expected to be in the top half of a 2% to 3% target range. Given this, it was "axiomatic" that there was more risk of rates rising than falling. "It's too soon to declare victory," said Stevens. "As a statement of probability, a rise is more likely than a fall."

The central bank raised rates three times last year to restrain inflation, which duly slowed last quarter. Underlying inflation was a lower-than-expected 0.5% in the fourth quarter, and was 3% for the year.

Financial markets showed little reaction on Wednesday as Stevens merely confirmed a mild tightening bias that was already priced in. Bill futures show around a one-in-four chance of a rise in the 6.25% cash rate by year-end.

"The impact on the market has been pretty minimal and that is because the message is in line with last week's statement," said Stephen Halmarick, co-head of market economics at Citigroup. "There remains upside risks to inflation and interest rates, but they seem more comfortable about inflation than they were last year. We would stick to our view that rates would be on hold," he added.

Watching Wages

Stevens was largely echoing the RBA's quarterly statement on monetary policy released last week. Then, the central bank said it was more confident that past tightening was restraining price pressures and it cut its forecast for underlying inflation to 2.75% this year, from 3.0% previously.

Still, the central bank also cautioned that the risks to inflation were on the high side, given a tight labor market and strong global growth.

In particular, the central bank has long been worried that the drum-tight labour market would lead to faster wage growth and rising prices.

The latest official data on wages on Wednesday showed a rise of 1.1% in the fourth quarter, slightly above market forecasts of a 1.0% increase.

That took annual growth in the wage price index to 4.0%, from 3.8% the previous quarter, but that was still below the 4.5% pace that analysts consider a threat to inflation.

Analysts noted that annual wage growth in the private sector held steady at 3.8% last quarter, and all the pick-up was in the public sector at 4.5%. "The private sector wage growth still appears relatively contained," said Adam Carr, a senior economist at UBS.

"Obviously wages are going to be something closely monitored over coming quarters but I don't think today's number by itself is going to cause too much undue alarm," he said.